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The political economy of public investment and public finance: challenges for social democratic policies

Author

Listed:
  • Jamee K. Moudud

    (Sarah Lawrence College, USA)

  • Francisco Martinez-Hernandez

    (New School for Social Research, New York, USA)

Abstract

The 'comprehensive socialization of investment' was a key policy goal of The General Theory. And yet, empirically, we have seen a decline in the public investment share in most OECD countries since the economic crisis of the 1970s. In this paper we study several issues concerning this decline. First, we draw on a number of different theoretical perspectives, including those of Smith, Marx, and Keynes, to explain the importance of public investment. Second, we show, using an error correction framework, that the levels of net government saving and gross government investment shares are co-integrated. Third, we discuss the various theoretical reasons underpinning this result. Following Kalecki (1943) and Alexander (1948), we argue that the crisis of the 1970s and growing international competition enabled powerful business groups to successfully push for fiscal austerity to increase 'labor market flexibility,' a policy framework that has since become the conventional wisdom. Fourth, building on the view that the state is relatively autonomous; Keynes's cautionary observation that the political context shapes business confidence; and Polanyi's argument that social democratic policies always run the risk of appearing to be a threat to private investment, we discuss the challenges to such policies in the current crisis.

Suggested Citation

  • Jamee K. Moudud & Francisco Martinez-Hernandez, 2014. "The political economy of public investment and public finance: challenges for social democratic policies," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(3), pages 333-364, July.
  • Handle: RePEc:elg:rokejn:v:2:y:2014:i:3:p333-364
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    Citations

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    Cited by:

    1. Gary Slater & David A. Spencer, 2014. "Workplace relations, unemployment and finance-dominated capitalism," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(2), pages 134-146, April.

    More about this item

    Keywords

    public investment; public finance; state; circuit of capital; effective demand; austerity; social democracy;
    All these keywords.

    JEL classification:

    • B1 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925
    • B2 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H4 - Public Economics - - Publicly Provided Goods
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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